Description of Research Objects

CHAPTER IV FINDINGS AND ANALYSIS

4.1 Description of Research Objects

ASEAN is a regional organization in South East Asia. It was established in 1967 under the Bangkok Declaration, with five original member countries: Thailand, Malaysia, Singapore, the Philippines and Indonesia. Latter it is called ASEAN 5. Brunei Darussalam joined in ASEAN in 1984. ASEAN then is called ASEAN 6, with relatively developed economies in Southeast Asia. Now ASEAN has ten member countries with Vietnam joining in 1995, Laos and Myanmar in 1997 and Cambodia in April 1999. The latest 4 members are called ASEAN 4, or CLMV. The whole ASEAN member countries are called ASEAN 10, and if Vietnam and Laos are not included, it is called ASEAN 8. Nowadays, the ASEAN region has a population of about 500 million, a total area of 4.5million square kilometers, a combined gross domestic product GDP of US737 billion, and a total trade of US720 billion. ASEAN FTA AFTA is the earliest FTA in Asia, which was initiated in 1992 Yi, 2005. Different from the two major regional integrations respectively in Europe and the North Americas, EU faced internal pressure politically in Europe internal security issue, namely to restrain Germany, and external pressure politically from former Soviet Union, and Economically from the U.S. , ASEAN creation was not necessarily logical. If one considers the circumstances of the five original countries, each of which was widely diverse, and all of which were linked to external powers, mainly through former colonial channels. It is doubtful whether a clear identity as ASEAN or Southeast Asia, for that matter existed at the beginning. This was because that almost every original ASEAN member nation had recently gained independence from external powers, and had the extremely strong desire to be independent both in politics and economy. One may imagine, therefore, that ASEAN was a creation of the Cold War, supported by the U.S. strategy for a political and economic formation at the regional level. Consequently, it is not surprising that ASEAN had only limited success during its early era. Although the member countries of ASEAN are geographically close, the interdependence in economy among ASEAN was minimal. Almost every ASEAN member nation adopted the import substitution model which is based on a closed economy. In addition, ASEAN was not established for economic purpose, so in the establishment stage, economic integration among ASEAN almost did not exist. Estimates during the establishment stage showed that the share of intra-ASEAN trade of the total trade of the member countries was between 12 and 15 percent. In summary, during the establishment stage of ASEAN, ASEAN was dominated by ideology, mainly for the purpose of political solidarity against communism rather than for the purpose of economic integration, although from neither aspects could the integrations be considered successful. Although the member countries of ASEAN are geographically close, the interdependence in economy among ASEAN was minimal. Almost every ASEAN member nation adopted the import substitution model which is based on a closed economy. In addition, ASEAN was not established for economic purpose, so in the establishment stage, economic integration among ASEAN almost did not exist. Estimates during the establishment stage showed that the share of intra- ASEAN trade of the total trade of the member countries was between 12 and 15 percent. In summary, during the establishment stage of ASEAN, ASEAN was dominated by ideology, mainly for the purpose of political solidarity against communism rather than for the purpose of economic integration, although from neither aspects could the integrations be considered successful Yi, 2005. After the end of the Vietnam War in 1975, with the retreat of U.S. power in southeastern Asia, the antagonism in ideology became less strong. The ASEAN member nations turned more to regional security concerns and domestic stability. Border disputes had long existed among ASEAN countries: Malaysia and Indonesia over two islands, Malaysia and Singapore over an island, Indonesia and the Philippines over some islands, the Philippines, Vietnam and China over some islands in the South China Sea. A domestic instability had also long existed in most of the member nations. There were many parties and religious factions in almost every member country. Some countries were controlled by military government, some countries cabinets were changed frequently, other countries anti-government armed forces and terrorist activities were furious. This led to the first heads of government’s meeting held in Bali in 1976 and the conclusion of the Treaty of Amity and Cooperation in Southeast Asia TAC. The TAC is an important non-aggression political pact of ASEAN. It declared the following fundamental principles: • Mutual respect for the independence, sovereignty, equality, territorial integrity, and national identity of all nations; • The right of every State to lead its national existence free from external interference, subversion or coercion; • Non-interference in the internal affairs of one another; • Settlement of differences or disputes by peaceful manner; • Renunciation of the threat or use of force; and • Effective cooperation among themselves. The TAC showed that domestic affairs should be free from external interference and that mutual disputes should be settled free from the force and threat. This demonstrated that the TAC was a political accord of landmark meaning, because it displayed the strong determination to be free from external powers interference, and to be respected and independent, dealing with the internal affairs among ASEAN through equal dialogue and peaceful means. This established a good political basis for southeastern regional security. Due to the TAC, ASEAN s regional security improved and the Regional security conditions could usually build confidence in promoting regional economic integration. In 1977, immediately after the conclusion of the TAC, the ASEAN member countries signed the Preferential Trading Arrangement PTA of 1977, which accorded tariff preferences for trade among ASEAN economies, aiming at enhancing the economic cooperation among ASEAN. Ten years later, an Enhanced PTA Program was adopted at the Third ASEAN Summit in Manila further increasing intra-ASEAN trade Yi, 2005. Substantial Integration Stage 1992-1997: from the Launching of AFTA to before the Eruption of Southeastern Asia Financial Crisis. During this period, the ASEAN member countries signed the ASEAN Declaration on the South China Sea, Manila, in July 1992. In the Declaration, Article 1 emphasizes by peaceful means, without resort to force to resolve all sovereignty and jurisdictional issues pertaining to the South China Sea; Article 3 resolves to explore the possibility of cooperation in the South China Sea relating to the security of maritime navigation and communication, protection against pollution of the marine environment, coordination of search and rescue operations, efforts towards combating piracy and armed robbery as well as collaboration in the campaign against illicit trafficking in drugs ; Article 4 advocates a code of international conduct over the South China Sea based on the principles contained in the TAC ; art. 5 invite all parties concerned to subscribe to this Declaration of principles. Article 5 is worth notice: because China is a major party in the South China Sea. The Declaration, in fact, invites China to negotiate with the party concerned South China Sea among ASEAN. In December 1995 in Bangkok, in the foreign ministers meeting, ASEAN concluded the Treaty on the Southeast Asia Nuclear Weapon-Free Zone. It was obvious that ASEAN s political integration still centered surround eliminating the regional security concerns. As the Treaty declared that the establishment of a Southeast Asia Nuclear Weapon-Free Zone will contribute towards strengthening the security of States within the Zone. In January 1992 at the Fourth ASEAN Summit in Singapore in January 1992, the Framework Agreement on Enhancing Economic Cooperation was signed, which included the launching of a scheme toward an AFTA, aiming at the elimination of tariff and non-tariff barriers and promoting trade liberation among the member countries. In 1995, the Fifth ASEAN Summit held in Bangkok adopted the Agenda for Greater Economic Integration, which included the acceleration of the timetable for the realization of AFTA from the original 15-year timeframe to 10 years. Economic integration in this period proved greatly successful. ASEANs economies developed at a surprising speed. Within the three years from the launching of AFTA, exports among ASEAN countries grew from US 43.26 billion in 1993 to almost US 80 billion in 1996, an average yearly growth rate of 28.3 percent 26. In the process, the share of intra-regional trade from ASEANs total trade rose from 20 percent to almost 25 percent. Tourists from ASEAN countries themselves have been representing an increasingly important share of tourism in the region. In 1996, of the 28.6 million tourist arrivals in ASEAN, 11.2 million or almost 40 came from within ASEAN itself. During this period, ASEANs economic development obtained a strong reputation. It was called the miracle of Southeast Asia in the world. Correspondingly, ASEANs political status rose too Yi, 2005. Break of ASEAN Regional Economic Integration by the Southeast Asia Financial Crisis In February 1997, the Southeast Asia financial crisis the financial crisis erupted. The ASEAN economies were hit hard and suffered great losses, and at the same time the crisis had tremendous impacts on other Asian countries and regions and later on developed countries, including the U.S., Japan and Europe. The total economic loss of South Korea, Thailand, Malaysia and Indonesia approximated US 600 billion, the GDP per Capita in US of these countries decreased to the level of ten years ago. During only a few months, the currency in these countries was devalued by 50 percent, or even 80 percent. The financial crisis fully exposed the long-established weakness of ASEAN s regional economy. They are: 1 Heavy Economic Dependence on the U.S. and Japan First, ASEAN member countries long and excessively depended on foreign capital, especially U.S. and Japanese capital, and the efficiency to make good use of the foreign loans was not high. So if the international balance of the ASEAN countries was a deficit, then the national currency should have devalued in terms of its real value. However, the national currency of most ASEAN s countries was pegged to U.S. dollar one way or another. Thus, when international balance of payments kept a deficit for a long time, the exchange rate of national currency with US dollar could not be maintained. The financial crisis erupted. Second, the previous rapid growth of ASEANs economy had been based on the export-processing model. In the 1970s and the 1980s, member countries processed downstream electronics products for Japan; when ASEAN went into the 1990s, the Japanese economy began to decline and the U.S. economy began to rise, ASEANs export became dependent on the U.S. market. Once the demand of the two markets was insufficient, the ASEANs economy would be affected seriously. 2 Excessively Open Capital Market The capital market in ASEAN country was excessively open. One World Bank study placed Malaysian and Thai trade policies as among the most open in developing economies. Opening domestic markets to outside money under an early round of pressure from the IMF [the International Monetary Fund brought a deluge of short term foreign investment and spurred heavy short-term borrowing from abroad, fueling a building boom. Take Thailand for example, by the mid 90s, a speculative binge in everything from high-rise office towers to condos to gold courses accounted for nearly 40 of growth in Thailand. 34 When the real estate bubble burst, conditioning the rather open capital market, too much capital rushed out, too quickly. The excessive inflow of capital reversed itself and fled with little regard for the actual strength of a particular economy. 3 Weak Intra-Regional Economic Interdependence The economic interdependence among the member countries was weak. The intra regional trade among ASEAN accounted for a small portion of the total trade of ASEAN, about no more than 25 percent, far less than the level of 40 plus of intra-regional trade among EU and NAFTA; moreover, such small portion was mainly produced between Singapore and Malaysia,36 the intra-regional trade among other ASEAN s countries was even smaller. Therefore once the demand outside ASEAN sharply declined, the intra-regional demand could not be spurred to absorb part of the products diverted from the exportation, and then the national and regional economy collapsed together. 4 Similarities in Industrial Structures Southeastern Asian export industries lay in the bottom layer of the global vertical division system, gathering a large number of labor-intensive and half capital-intensive industries. It became the weakest part in the global economy chains. ASEAN s member countries repeated the same development model: absorbed foreign capital, invested in the export-processing industries, and their products tended to be alike. Whether in their domestic economy or even in the intra-regional economy among ASEAN, the development layout of industrial hierarchies and diversities was not formed; almost none of the production chains were wholly shaped. When the global economic structures were adjusted and such adjustments caused the demand for ASEAN s exports to greatly decline, ASEAN s downstream processed products would be superfluous and ASEAN s economy would be damaged seriously. Due to the financial crisis, ASEAN s competition in exportation and attraction of foreign investment was unfavorably affected immensely. In addition, because its member countries had to engage in dealing with domestic problems caused by the financial crisis, the mutual cooperation and coordination among ASEAN were suspended. As a result, ASEAN s status and influence both in economy and politics declined rapidly either in Asia or in the world. The financial crisis provided ASEAN with many lessons. If in the future we are in retrospect of the process of ASEAN s regional economic integration and even of the later East Asian regional economic integration, we will discover that the financial crisis undoubtedly acted as a watershed and even a catalyze. Before the financial crisis, the rapid economic growth of ASEAN mainly depended on foreign capital and markets, based much less on intra economic interdependence among ASEAN and their domestic markets. The member countries had no strong motivations to enhance a complete integration to close their relationship in economy. The financial crisis confronted ASEAN with many new issues for discussion. First, the global IMF failed in the financial crisis. It suggested that a regional monetary and financial cooperation would be necessary. Second, unlike the developed countries, the door of the non-developed countries capital market can only open step by step, rather than too fast. Third, the simplification of monetary policy, which was only pegged to U.S. dollar, should be changed, because once the U.S. dollar s value fluctuates badly, the concerned countries monetary and financial system will suffer from great influence. Therefore the monetary policy should be diverse, for example, adopt a package of pegged moneys. Besides, the similarities of regional industrial structures and weak intra- regional economic interdependence were viewed as the in-depth causes of the financial crisis. It was considered that establishing among ASEAN the diverse and hierarchical economies, stretching the production chains, strengthening economic complementarities and enhancing the intra-regional economic interdependence will effectively form regional competitive force to resist to the external economic impacts, making ASEAN a regional trade bloc in a genuine sense. So it was a logical consequence that after the financial crisis ASEAN began the complete intra-regional economic integration in a variety of areas to enhance the intra- regional economic interdependence Yi, 2005. In responding to the crisis, ASEAN heads of governments in December 1997 set out their ASEAN ‘Vision 2020’ statement. The vision contained a message in favor of moving towards closer cohesion and economic integration. It was soon followed by an action plan concluded in the following year at the ASEAN summit in Hanoi. The action plan among other things, calls for a strengthening of the financial system in the region to maintain regional macroeconomic and financial stability, and to intensify cooperation on money, tax and other financial related matters. Prior to East Asia crisis, economic integration in East Asia has been enhancing via the market driven forces such as cross-border trade, FDI foreign direct investment and finance. Over the past 20 years, international trade and FDI activities have expanded rapidly through multilateral international institutions such as World Trade Organization WTO, Asia Pacific Economic Cooperation APEC as well as unilateral or multilateral trade liberalization processes. Nevertheless, the patterns of economic cooperation in East Asian countries have been changed, especially after the East Asia financial crisis erupted in mid-1997. The rapidly changing international environment and East Asia crisis have emerged a common interest amongst East Asia countries in creating a strong impetus for regional cooperation. This has led to the Chiang Mai Initiative CMI agreement on bilateral swaps and discussion of the possibility of creating a monetary union among the ASEAN+3. Indeed, there have been few attempts proposed to create cooperative frameworks that help to prevent and manage future currency crises and to promote economic efficiency by developing sound financial systems. Japan, for example, has proposed to create an Asian Monetary Fund AMF in September 1997. The members of this Fund would contribute some portion of their international reserves to a central fund, which would be utilized to provide a financial assistance to countries affected by external crises such as financial and currency crises. However, the United States, China and the IMF against the establishment of the AMF proposal on two reasons: soft conditionality and duplication. As a further step in promoting Asian economic integration, Japanese finance minister Miyazawa has made a proposal that is called “New Miyazawa Initiative” in October 1998, which aimed to set up a financial assistance scheme totaling 30 billion US dollars. This Initiatives, however, has met with strong criticism because the proposal is too Japan-centered, and the attitude of Japan in regional initiatives is rather ambiguous Moon, 2000 excerpt from Choo and Choong, 2009. Although this proposals were rejected, there were few more successful initiatives have been proposed towards a closer monetary cooperation in Asian. For example, a conference was held in Manila in November 1997, which consists of deputy finance ministers and central bank governors from 14 mostly Asian countries. The outcome of the conference was the establishment of Manila Framework Group MFG, a new framework to enhance Asian Regional cooperation and to promote financial stability in the region. In addition, the ASEAN finance ministers have agreed to establish the ASEAN Surveillance Process ASP in October 1998 to encourage policy dialogue based on the peer review and mutual interest among ASEAN member countries. In November 1999, China, Japan, and South Korea have been invited to join ASP, which making “ASEAN+3” reality in financial surveillance Choo and Choong, 2009. To reinforce the Hanoi action plan in order to achieve this goal, ASEAN nations have also moved forward by looking at a wider region in terms of economic and financial cooperation through the Chiang Mai Initiatives CMI that was launched in May 2000. The initiative aimed to develop a network of bilateral swap agreements local currency to US dollar or Japanese among Northeast Asian countries, and strengthening an intra-ASEAN swap agreement. In May 2002, bilateral swap agreements between Japan, Korea, Thailand, Malaysia, Philippines, and China have been initiated. Also the ASEAN swap agreement was extended to cover all the 10 member countries. The CMI represents the first milestone towards constructing a coordinated intervention policy and currency arrangement regionally. Nevertheless, this step is more likely to be more a case of “pooling reserve” in dealing with external instability or crises than a commitment to bilateral intervention to stabilize regional bilateral exchange rates. Obviously, financial cooperation has seen some positive progress among East Asia countries; however, incentives for monetary cooperation are still lack Choo and Choong, 2009. Although some economic indicators are agreeable, China, Japan and Korea do not appear to be economically suitable for monetary cooperation with ASEAN Jikang and Yin, 2005. The uncertain economic times ahead however merit discussion on how further integration could help the organization maintain economic stability while raising its regional competitive profile. This study finds that while significant reforms can be made in the absence of such a union, there are likely to be considerable benefits that apply only after full integration of ASEAN takes place Chaudhury, 2009.

4.2 Data Analysis